LONDON, Sept 17 (Reuters) - The yen fell against the euro
and moved well away from recent four-month highs versus the
dollar on Wednesday, with risk aversion alleviated after U.S.
authorities extended a lifeline to insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz).

Investors were still on tenterhooks, however, as volatile
equity markets reflected a strong sense of unease about
financial sector health.

The U.S. Federal Reserve elected to leave interest rates on
hold on Tuesday at 2 percent. But it later said it would lend up
to $85 billion to AIG -- once the world's largest insurer -- for
two years in exchange for a 79.9 percent equity stake
[ID:nHKG15677].

Analysts said steps taken by the Fed had been well received
for now.

"The action from the Fed was quite positive. They didn't cut
rates as they seem to acknowledge clear separation between the
needs of the economy and financial sector, Danske Bank currency
strategist Kapser Kirkegaard said.

"AIG was simply too big to fail and the implications for
most markets would have been overwhelming," he added.

News that British Bank Barclays Plc (BARC.L: Quote, Profile, Research, Stock Buzz) would buy
several parts of Lehman, whose collapse on Monday sent global
equity markets into a tailspin, also helped paper over
deep-seated worries.

European stocks followed their U.S. and Asian counterparts
higher, with banks in the vanguard on relief at the AIG plan,
which was reflected in currency markets via the yen's retreat.

By 1102 GMT, the euro was up 1.2 percent at 150.20 yen
<EURJPY=>, while the dollar was flat at 105.74 -- but well away
from four-month lows seen on Tuesday at 103.51 yen <JPY=>. The
single European currency also gained 0.6 percent to $1.4203
<EUR=>.

The Australian dollar <AUD=> was trading at 84.11 yen
<AUDJPY=R>, well off a 3-1/2 year low of 81.40 yen set in the
previous session.

JITTERS REMAIN

While European stock markets rose, shares in UK lender HBOS
(HBOS.L: Quote, Profile, Research, Stock Buzz) moved violently, falling more than 50 percent at one
point, after taking a battering earlier this week. It later
recovered after a person familiar with the matter said it was in
merger talks with Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz). The two banks declined to
comment.

Meanwhile interbank money markets remained stressed.

Overnight dollar funds were borrowed at rates as high as 8
percent earlier in the European session, according to prices
indicated on Reuters screens, before easing back <USDOND=> later
in the session.

Analysts said there was no room for complacency.

"It would be a brave investor who believes the marginal
improvement in risk appetite overnight is the beginning of a
longer trend, especially with the money markets still gummed
up," said Daragh Maher, deputy head of global FX strategy at
Calyon.

Britain's economic backdrop continued to show deterioration
with data released earlier showing that the numbers of jobless
in Britain leapt by 32,500 in August, its biggest rise since
December 1992 [nONS003793].

The euro was up 0.3 percent at 79.44 pence <EURGBP=>.

Minutes of the Bank of England's latest policy meeting
showed 8 of 9 policymakers voted to leave borrowing costs on
hold at 5 percent, with one policymaker calling for a 50 basis
point cut while a hike was also discussed.

Thomson
Reuters journalists are subject to an Editorial Handbook which requires
fair presentation and disclosure of relevant interests.

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